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Monthly Market Update – May 2024

Slowing economy and stubborn inflation

As analysts assess the health of the economy, the latest jobs reports raise concerns about a potential slowdown. In April, nonfarm payrolls rose by the smallest amount in six months. The unexpected slowdown in job creation was underscored by a rise in the unemployment rate, which ticked up from 3.8% to 3.9%(1). This rise in unemployment, coupled with weaker-than-expected business activity in the service sector(2), suggests a potential cooling in the labor market. In addition, jobless claims are on the rise, with significant increases in claims observed in New York and California, where a minimum-wage hike may further impact unemployment(3). Finally, a May report from an employment agency found that job cuts have decreased, but hiring plans are at their lowest since 2016(4).

The US economy experienced slower growth in the first quarter of 2024, with real GDP increasing at an annual rate of 1.6%, falling short of the 2.5% expected by economists and down from 3.4% in the previous quarter(5). Consumer spending and housing investment were key growth drivers, although personal spending grew at a slower-than-expected rate. Spending on services saw its largest increase since Q3 2021, primarily driven by health care and financial services, while spending on goods declined due to constraints in cars and gas.

In a much-needed reprieve from inflation, the Consumer Price Index (CPI) slowed for the first time in six months, increasing by 0.3% in April and by 3.4% over the past year(6). Core CPI, which excludes the more volatile food and energy components, rose 0.3% in April and 3.6% from last year(6). Economists see core CPI as a better inflation indicator, which showed a three-month annualized increase of 4.1%, the smallest since the start of the year(6). However, The Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditure (PCE) price index, rose at a higher-than-expected 3.7% rate, marking the first quarterly acceleration in a year(7). Bloomberg Economics notes that the April CPI report may support the possibility of a July rate cut, but the Fed remains cautious(8).

Bottom line

While the latest inflation figures may give the Federal Reserve some hope that inflation is resuming its downward trend, officials need more data before considering rate cuts. Chairman Jerome Powell emphasized the need for patience, stating that the central bank must allow restrictive policies to take effect. Several Federal Reserve officials have stated that rates would likely remain high due to persistent inflation, with some anticipating no rate cuts this year. While acknowledging the economy’s positive momentum, policymakers have expressed caution regarding potential economic shocks and commercial real estate risks, reinforcing the Fed’s commitment to achieving the 2% inflation target. Either way, changing expectations on what the Fed may do throughout the year will likely remain and, if they shift rapidly enough, can cause short-term bouts of market volatility. Thankfully, so far this year, those shifting expectations have been effectively limited to the bond market.

(1) Source: US Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
(2) Source: Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/april/
(3) Source: Department of Labor, https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20240935.pdf
(4) Source: Bloomberg News
(5) Source: Bureau of Economic Analysis, https://www.bea.gov/news/2024/gross-domestic-product-first-quarter-2024-advance-estimate
(6) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
(7) Source: Bureau of Economic Analysis, https://www.bea.gov/news/2024/personal-income-and-outlays-february-2024
(8) Source: Bloomberg News